In a related note, a consortium consisting of Abertis (MCE:ABE) and Citigroup (C) won a bidding war to take over a 75 year lease on Pennsylvania’s turnpike. The cost to take over the state’s main toll road? A cool $12.8 billion. This is one of the biggest privatizations of infrastructure in United States history.

These recent events highlight the lucrative nature of infrastructure investments and the persistent and controversial trend of foreign companies and sovereign wealth funds acquiring huge infrastructure assets in the United States. The political environment grows increasingly hostile as national and local politicians, including the presidential candidates, look to explain Americans’ economic struggles with a cornucopia of reasons including free trade agreements like NAFTA, a “corrupt sitting president,” and globalization generally.

This issue of foreign investment in public infrastructure has been on my radar since late 2006. Below is an essay I wrote for an investment newsletter published in January 2007 distributed to high net worth clients.

Public Infrastructure Sales: Samurais, Jihadists, and Masters of the Universe

“The Japanese are coming!” Remember when modern-day Paul Reveres shouted this refrain in the 1980s? Honda (HMC), and Toyota (TM) earnestly began their conquest of the American driver and, resultantly, Detroit’s mammoth metal benders. Would-be samurais from a nation of diminutive conformists threatened our towering sense of American exceptionalism by snatching up national treasures from our private sector like Pebble Beach, Columbia Pictures, Universal Studios, and Rockefeller Center. Although the apocalyptic visions of Japanese dominance and American indentureship have faded, the “buying of America” continues today.

Only now, the purchasers hail from different shores and their acquisition targets are of a more public flavor. In January 2006, a plan to privatize the Indiana Toll Road came to fruition when the State of Indiana entered into an agreement with Cintra (a Spanish construction firm) and Macquarie Bank (an Australian bank). The Spanish-Australian partnership paid the Indiana State Government $3.85 billion for a 75-year lease to operate and maintain the toll road. The same consortium recently entered into a $1.83 billion lease to operate the Chicago Skyway Toll Bridge. As these foreign entities begin to exact payments from beleaguered commuters, resistance to foreign ownership of public infrastructure grows.

Free trade and free markets be damned. Early this year, public sentiment derailed the proposed Dubai Ports World acquisition of U.S. ports facilities in New York, New Jersey, Philadelphia, Baltimore, New Orleans, and Miami. In a cacophonic display of bipartisan zealousness, Republican and Democratic members of Congress questioned the wisdom of selling strategic infrastructure assets to not only a foreign country, but one which two members of the 9/11 hijackers called home. The overall tone could be summed up by the mordant one-sentence letter Representative Sue Myrick (R-NC) sent to President Bush that read, “Dear Mr. President: In regards to selling American ports to the United Arab Emirates, not just NO – but HELL NO!”

Being neither knee-jerk nationalists nor adherents to Ricardian economic orthodoxy, the editors of this publication acknowledge the merits of both the free market argument and the argument for excluding strategic infrastructure from the free market. One of the tenets of free trade asserts that private industry is more efficient at delivering services than government, and experience has confirmed that theory. But, when does that precious efficiency bump up against national sovereignty and security? Pragmatic protectionists should point out that ports and roads are different species in the genus of public infrastructure; that roads are strategic but ports are more strategic.

Do we as a nation make distinctions between domestic private players and foreign entities? How do we respond to foreign companies that are not entirely private, being controlled by foreign governments? In the case of Dubai Ports World, the United Arab Emirates government owns a stake in the port operator. How do our reactions at home affect the ability of our own private companies to venture abroad and invest in and own foreign assets?

Through all this brouhaha, the editors of this publication see an opportunity for the many domestic leveraged buyout firms within our own borders. With over $175 billion raised in 2006 alone, the industry is flush with liquidity. At the risk of sounding cliché, we echo the industry’s mantra that there is “too much capital chasing too few deals.” With all the largest funds finding themselves in highly contested auction environments for companies suitable for buyouts, even the most sanguine investors admit that future returns will lag past performance. Public infrastructure as an asset class represents a potential opportunity to deploy some of that excess liquidity and to diversify LBO or private equity portfolios.

Some questions beg consideration. This asset class will no doubt offer lower returns than traditional private equity investments; does the stability of returns compensate for that shortfall? What are the reasonable exit opportunities? What consequences might arise from shifting concepts of private and public property? How can the public be safeguarded from the specter of crony capitalism?

Questions notwithstanding, infrastructure investments with their super-stable revenue and profit streams offer the possibility of smoothing out the volatility of returns in portfolios otherwise dependent on the ever shifting environment for initial public offerings, mergers, and acquisitions. The promise of stable returns is causing some financial masters-of-the-universe to contemplate establishing investment pools to capture this opportunity. Goldman Sachs (GS), the Carlyle Group and other top institutions are all rumored to be pitching this idea to limited investors. We’re quite sure that hedge funds will want to get into this game too.

We suspect there might even be an inefficiency here for domestic buyout firms to exploit. Public sentiment against encroachment by foreign firms might allow for lowball bids by domestic buyout firms. This compromise between public and private could placate the citizenry. The Golden Gate Bridge anyone?

The one speaker that intrigued me most was Matthew Simmons of Simmons & Company International. He spoke about “peak oil” and a world vastly transformed by the essential “drying up” of oil fields in Saudi Arabia in particular and the world in general. In a world of peak oil, we would not travel as much. Everything becomes more expensive because everything is less accessible and less transportable. New political and cultural shifts will take place that will reshape the globe as we know it. Simmon’s book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, which Zions was handing out free at the tables, is a sobering argument for why oil prices are so expensive right now. Of course, Simmons is an investment banker to the energy industry so everything he says must be taken with a grain of salt. For that matter, anything anyone says should be taken with a grain of salt. Always consider the incentives of the messenger.

Nevertheless, crude oil cooperatively jumped nearly 5% last week. Over the past year, black gold has doubled in price. Traders cite the falling dollar as one major driver of escalating spot prices, but Simmons would argue that exogenous factors such as foreign exchange rates assert much less influence than long term shortages of oil.

Two weeks ago, the markets turned in a defiantly strong performance. Equities in particular were bought up furiously by institutions like the latest Grand Theft Auto installment. Everyone loves a bull market and only the most strident bears and short sellers could lament upwardly trending indexes. But the economic indicators were still trickling out rather bleakly and thus I reasoned that the rally was overdone. The equity markets proceeded to give back all their gains and then some last week. Luck was a lady last week.

Macro

Back to oil. In the face of oil’s ascent, I dubbed our current era the Black Bubble. I attributed a good portion of crude’s rise to the influx of speculators and momentum investors/traders looking to ride the bubble to even frothier levels. It isn’t easy to make a contrarian call, so it was with great relief to find that George Soros, the billionaire hedge fund trader, philosophical political activist, and philanthropist, recently spoke of an oil bubble. He’s certainly a lot better at extracting alpha from the market than I am.

“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.

The comments are significant, not only because Mr Soros is the world’s most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices.

However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.

Mr Soros also warned that the Bank’s inflation report represents a “Faustian pact”, obliging it to keep interest rates high to control inflation, even as the economy is starting to slump.

He said: “The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn’t have in the 1970s.”

Soros is speaking of the Bank of England here, but that is essentially the same “rock and a hard place” I expected Ben Bernanke and our own Federal Reserve would have to contend with. Not only is oil a key component of rising inflation, but food is the twin prong in the vice that is squeezing the consumer’s wallet.

The government likes to exclude oil and food from “core” inflation measurements. It is as if the pinheaded bureaucrats don’t think people buy food and oil. The last time I checked, food and oil are both very “core” elements of our budgets and lives.

So indeed, I believe we are in a Black Bubble. George Soros would know better how to express that outlook with an optimal trade. I’m much more of a long term investor and quite incompetent at finding the optimal trading vehicle.

Micro

Grand Theft Auto IV on Track to Set New Sales Records - Take-Two Interactive Software (TTWO), the publisher of GTA IV, is currently being courted by the much bigger Electronic Arts (ERTS). According to some reports, GTA IV will pass Microsoft’s (MSFT) Halo 3 as the best selling console video game of all time. Seems to me there is no GTA fatigue despite many different installments since the “game-changing” GTA III. Also seems to me that TTWO ought to hold out like Yahoo! (YHOO) for a higher price.

Travel Appears To Be Next Up For Google - Travelzoo (TZOO) has been a fashionable pick by some value investors. What’s not to like? The company essentially traffics in information, one of the most scalable and profitable business models ever invented by man. The company has healthy margins and return on equity (ROE), an unencumbered balance sheet, and a flock of short sellers ready to be squeezed. Heavy insider buying adds a cherry on top. But something wicked this way comes; Google (GOOG) is expected to extend its tentacles into the online travel information industry.

Mindray Medical: Strong Report and Fast Growth - Mindray Medical (MR), one of the leading medical device companies in China continues to hum along with breathtaking growth. More than half of the company’s revenues come from outside of the Middle Kingdom, but the recent humanitarian disasters brought on by earthquakes and aftershocks may send demand skyrocketing in the homeland.

A Wrench In The Machine? - Conventional wisdom says the United States is losing its manufacturing sector. Mostly true. Badger Meter (BMI) is one of the few companies thriving as a manufacturer of specialized industrial equipment. BMI makes water, oil, and fluid meters. ESCO Technologies (ESE) competes directly against Badger Meter in pushing the next generation of networked utility meters that will eliminate the need for the local utility company to send a technician out to read your water meter. Full Disclosure: I currently have a long or short position in BMI in one or more of my private investment partnerships.

Blackboard Application on Facebook - Having operated Web startups involved in the social networking space for over 3 years, most news items involving Facebook or Myspace (NWS-A) usually register a blah on the blah-bam scale. The new Facebook application by Blackboard (BBBB) is a bam. This web application will not change Blackboard’s fortunes much, but the idea that social networks, unlike the banal uses self-proclaimed social networking gurus foist on unsuspecting clients, can actually be used to facilitate something robust sends chills up and down my spine. The megatrend of online education cries for an intelligent implementation of an educational social network.

Natus Medical prices public offering of 4M shares - Shareholders reacted allergically to Natus Medical’s (BABY) registration of secondary offering shares. Turns out demand for the secondary offering was stronger than expected and the company’s stock rebounded. Natus Medical’s recent acquisitions make sense. Company management has shown an ability to allocate capital intelligently. The capital raised through the secondary offering will allow the company to bolster its competitive position as weaker competitors exit the industry by selling. Full Disclosure: I currently have a long or short position in BABY in one or more of my private investment partnerships.

But we are all shareholders now. Even as our home values continue to sink, our brokerage accounts are softening the pain as equities turned in a strong performance over the last week. Technology stocks, much to my chagrin, turned in a 3.4% pop. In investing, paradoxically, there is nothing as potentially humbling as having a strong opinion. The S&P 500 and Dow Jones Industrial Average followed the leader and also rallied impressively. Curiously, REIT stocks topped them all, suggesting that the market is discounting further weakness in real estate.

“Go East Young Man!” That ought to be the rallying cry for ambitious college graduates. Learn an Asian language and stake your future in emerging markets. While almost all equity markets have performed negatively over the last twelve months, emerging markets continue to appreciate at a blistering pace with Asia being a driving force. I count myself lucky that my parents taught me to speak Cantonese-Chinese. They displayed amazing persistence as I was not a receptive student to one of the most difficult languages in the world to master. I am still amazingly inept at it, but I could survive in Hong Kong and Guangzhou.

The Black Bubble inflated just a tiny bit. Nonetheless, crude oil set a new record high - topping $127 per barrel before settling at $126.02 per barrel. As the summer driving season approaches, will the high cost of oil discourage road warrior Americans from taking that trip to the Grand Canyon and other national monuments?

Macro

American corporations are flush with cash. Big blue chips are flush with cash. Mid-sized companies are flush with cash. Small capitalization technology companies are flush with cash; actually, a wide swath of technology companies is flush with cash. So while the major market indexes have rebounded strongly, many individual company stocks are still way off their price highs. We need more dudes like Carl Icahn.

Mr. Icahn last week announced that he had accumulated a significant stake in Yahoo! (YHOO) and plans to nominate an alternative board in order to force a sale of Yahoo! to Microsoft (MSFT). He contends that the current Yahoo! board acted irresponsibly by rejecting Microsoft’s buyout bid.

This is precisely the time for cash-rich companies to go shopping for fallen competitors on the cheap. If the pickings are slim, then they ought to deploy their cash and buy back shares. If corporate managers cannot put corporate coffers to good use by engaging in business activities that produce strong returns on investment (ROI), they should return that cash to shareholders.

There are plenty of situations that could use a good activist investor to spur intelligent deployment of cash. Smart acquisitions and stock buyback programs would further bolster the current rally. There are few good reasons, given the prevailing environment, to hoard cash.

Micro

CBS in $1.8B deal for online news, info site CNet - This is exactly what I’m talking about. CBS Corporation (CBS) has a decent balance sheet and plenty of cash to make this acquisition of CNet Networks (CNET). Startup entrepreneurs rejoice! With Rupert Murdoch’s News Corporation (NWS-A) busily gobbling up web companies to bolster its Fox Interactive Media unit and Time Warner buying new properties in an attempt to make its eventual spinoff of AOL more attractive, the rest of the media giants will play lemming to catch up. Suddenly, everyone wants to be Web 2.0! Here’s a very informative piece from Amy Webb showing who owns what in Web 2.0 - a handy thing to keep at the side of your desk if you’re a venture capitalist with some Web 2.0 in your portfolio:

Meet Carl Icahn’s Yahoo Board - Let’s revisit the drama that is Yahoo! Mark Cuban is on the alternative board. Cuban is the smart fellow who sold Broadcast.com for $5.7 billion at the height of the dotcom bubble. He also had the foresight to sell whatever shares he had for cold hard cash. In life, timing is everything. This time though, the payoff for Cuban will not be quite so lucrative. If Icahn is successful with this proxy battle, I liken Cuban’s likely short stint, as a director, to community service. He’ll perform a service to the community of Yahoo! shareholders by forcing a sale to Microsoft.

Comcast to Acquire Plaxo - Here is one that doesn’t make sense, no matter how flush Comcast’s (CMCSA) coffers are. Did I mention that big media companies will begin to behave like lemmings? If the big cable giant is going to move into this space, it should also set its sights on LinkedIn.

Ask.com buys Dictionary.com parent Lexico - Ask.com, owned by IAC/InterActiveCorp (IACI) takes ownership of Lexico for a reported $100 million. IAC/InterActiveCorp is another one of these bigger tech companies with a boatload of cash. The options are simple - invest it, buy competitors, or return to shareholders. IAC/InterActiveCorp will undergo big changes itself as it prepares to spin off non-core properties.

Natus Shareholders Throw A Fit - Let’s look at a different kind of tech. Natus Medical (BABY) develops and sells medical devices that help in the screening, detecting, and monitoring of newborn conditions. It filed to issue a secondary public offering of 3.5 million shares. Shareholders reacted violently to the potential dilution, but the company is simply attempting to raise more cash in order to make more acquisitions. It is essentially the same theme being played out over in the software industry with Microsoft, AOL, and IAC/InterActiveCorp. Full Disclosure: I currently have a long or short position in BABY in one or more of my private investment partnerships.

These features generated higher levels of engagement (or stickiness) many times greater than traditional web properties. This stickiness in turn attracted marketers and advertisers who wanted to be where the people were. This stickiness premium netted the founders of social networking startups wealth reminiscent of the dotcom bubble. Myspace sold for nearly $600 million in a buyout by News Corporation (NWS-A), Facebook was valued at $15 billion by Microsoft (MSFT), and Bebo’s owners sold out to AOL (TWX) for $850 million.

With great rewards come hordes of wannabes and copycats. Many people are staking their future on social networking. Some are attempting to create me-too social networks. Others are pimping themselves as “experts” in social networking and offering their “consulting” services. I did the same with my SocialOptimize startup. Although my now defunct startup was able to deliver good social networking applications to prominent venture-funded startups, I soon realized that social networking would become a game with few winners and many losers. I argued that once Web 2.0 methodologies become widely adopted and social networks become a feature set rather than destinations, those same Web 2.0 methods will become standardized commodities.

That march to commoditization may occur faster than anticipated. Google (GOOG) recently announced its Friend Connect program, which allows virtually any website to plug in a turnkey social networking suite. Owners of websites can, like Google’s AdSense product, embed a snippet of code in their webpages and immediately enjoy the benefits of offering social networking features to their site customers or visitors. Think of Google Friend Connect as a more powerful Google AdSense, but instead of offering relevant text ads it offers your site visitors the ability to connect with their friends, connect with new friends, interact with each other with messages, and share content.

Here are the search engine giant’s stated high-order benefits of Google Friend Connect (GFC):

• Anyone with a basic understanding of the Web can implement GFC, no need to hire an expensive programmer or self-branded “social media guru.”
• Drive traffic: people who discover interesting sites can bring their friends with them, and can opt-in to publish their activities on those sites back into their social network, attracting even more visitors.
• Increase engagement: access to friends and OpenSocial applications provides more interesting content and richer social experiences.
• Less work: any site can have social components without hiring a programming team or becoming a social network.

That last point is key. Google doesn’t want more “social networks” per se - it just wants more websites to have social features. A while ago, it signed a deal with Myspace to serve Google ads. At the time, Google paid a huge premium and there are reports that claim the Mountain View, CA behemoth has not recouped its cost. Signing advertising deals with mass market social networks can be expensive. Helping mom and pop sites to have social networking features will, in the long run, give Google a cheaper alternative. Google is simply facilitating the creation of more web pages (places to serve its ubiquitous ads), pageviews, and advertising inventory.

The message is clear. You don’t need to become a social network; social networking features are a commodity. Here, have a few social networking features for free.

The arsonists are covering their tracks by starting more than one fire. It is much harder to pinpoint who would be motivated to escape from their rapidly deflating home equity values by taking a torch to things. Whatever happened to rule of law and respect for property?

On a related note, Jordy Gunderson cites an interesting piece from presidential candidate Ron Paul regarding the mistakes big government made in managing the economy.

The tech-laden Nasdaq Composite took a 1.3% dive last week. Does this in any way validate my technology industry bifurcation thesis? Absolutely not. Relative to the rest of the equity markets, the Nasdaq Composite performed decently. The S&P 500 stock index saw a 1.8% decline while the Dow Jones Industrial Average (a poorly constructed index) lost 2.4% over the last week. More painfully for investors anticipating a real estate recovery, REIT stocks lost 3.2% collectively. The Nasdaq Composite (actually a very well constructed index) performed better than other equity indexes. In essence, technology stocks as a whole, large blue chips and second tier small caps, did better than the old industrial giants found in the DJIA and the big caps in the S&P 500 by a significant margin.

We have seen very little evidence of second-tier technology companies suffering from the recent slowdown in economic activity. This is particularly interesting because one of the historic catalysts for technology capital investment by enterprises, the Microsoft (MSFT) operating system upgrade cycle, is not a large factor in this market. The Vista operating system has not caught fire like previous Microsoft operating system launches. The Windows XP operating system was a blockbuster and so were earlier versions of Windows. Prior upgrading cycles resulted in renewed investment in computer equipment, computer peripherals, and secondary software products.

Macro

I’ve alluded to my concern about Ben Bernanke’s ability to display great staying power in his effort to jump start the economy by lowering interest rates. With oil and commodity prices barreling higher every week, the specter of inflation looms menacingly and hampers the Federal Reserve’s ability to continue lowering rates. The macro themes of globalization and emerging giants like China and India have been the drivers of skyrocketing prices in oil and food commodities.

However, I see imbalances developing between asset prices and the underlying supply and demand curves. Crude oil’s meteoric rise to record prices never before seen in history is rooted primarily in fundamental, systemic growth in demand. But the recent, almost parabolic rise in oil prices suggests that speculators and trend followers are piling in, hoping for continued profits flowing. Speculators and trend followers, by definition, introduce inefficiencies and imbalances to asset prices. China’s trade surplus is growing at a decelerating pace. Our diminished dollar makes our goods and services much more attractive to foreign consumers. It also makes foreign goods and services much more expensive for Americans to buy. The trade frictions caused by our historically cheap dollar might just slow down emerging markets growth and thus the demand for oil. Oil is the hot investment right now, but it could be flammable for recent riders of the bandwagon. We might be caught in what I call the “Black Bubble.”

Micro

Priceline surges on strong earnings, outlook - Priceline.com (PCLN) hit an eight-year high as both its domestic and international businesses enjoy huge demand. The company’s business model, which allows travelers to name their own prices or bids, has been attracting legions of bargain-hunting travelers. How long will this last? Priceline.com is one of the few companies thriving in the travel industry. The airlines, other online travel retailers or portals, and car rental companies have mostly seen their stocks decline over the last year.

Constant Contact’s first quarter revenue soars - Email marketing is so Web 1.0, isn’t it? Older Internet users still rely heavily on email. Early adopters and younger users of the Internet are less reliant on email. Instead, they gravitate to other services such as instant messaging, text messaging, and social networking. Twitter, is a very interesting next generation platform that further reduces the need for email communication. All these usage patterns do not bode well for Constant Contact (CTCT), a provider of software for email marketing campaigns.

The CAPS Screen: 10 Small Caps on Fire - The Motley Fool includes Interactive Intelligence (ININ) in one of their interesting screening exercises. Interactive Intelligence makes software that manages call center or contact center operations. Screens are a good way to generate investment ideas, but a formulaic investment program based on screened variables does not automatically lead to good investments. Many investors employ screens to find stocks selling cheaply. Sometimes, companies are cheap because they deserve to be cheap as the economic merits of their businesses deteriorate. An investment decision made solely by screening and without knowledge of the competitive standing of the company in question is akin to marrying a girl solely because she comes from a good family. Full Disclosure: I currently have a long or short position in ININ in one or more of my private investment partnerships.

National Oilwell Varco, Inc. Q1 2008 Earnings Call Transcript - I mentioned that oil appears to have become a speculative market surrounded by a thin film of soapy substance. Bubbles don’t fizzle out, they usually burst or pop with ferocious force. National Oilwell Varco (NOV) provides equipment and supplies to the oil and gas industries and has been a big beneficiary of the rising price of crude. The price of oil may continue its amazing ascent or it may flush out the speculative latecomers, but the imperative to keep searching and producing oil will hardly diminish.

James River Coal 1Q loss widens on higher costs, stoppage - Alternatives to oil become more attractive as black gold becomes more expensive. Thus, oil shale, ethanol, coal, solar power, and biofuels become serious considerations. I have been investing with this thesis for over a year. James River Coal (JRCC), one of the worst managed coal companies around, has seen its stock move in lockstep with the rising price of oil. So although it continues to run into management and operating gaffes, the stock market has rewarded it and its highly leveraged balance sheet with new price highs. Full Disclosure: I currently have a long or short position in JRCC in one or more of my private investment partnerships.

First, Anderson argues that social networking should be a feature, not a destination. I agree wholeheartedly. The ability to interact with friends, share content, and engage in self-expression should be standard features on most websites. The unique methods of encouraging creative online behaviors known as Web 2.0 will filter through the rest of the Internet and, soon, your grandfather’s favorite website will allow him to engage in “social networking.”

Second, Anderson cites stats regarding advertising revenues or costs from Myspace (NWS-A), Facebook, and Ning. He shows that monolithic social networks like Myspace and Facebook, which attempt to be all things to all people, are having immense struggles with selling advertising at worthwhile rates. He also implies that Ning’s niche vertical social networks built by customers command higher advertising rates. Some marketers happily pay the higher rates because the engagement level is greater on these niche vertical networks. Advertisers also prefer the more intelligent targeting of relevant audiences. Myspace, Facebook, Bebo (TWX), and other undifferentiated mass networks are actively trying to improve their targeting abilities so it will be interesting to watch this competition evolve.

Finally, Anderson asks a pointed question about Facebook’s implied $15 billion valuation when Microsoft (MSFT) bought a small percentage of the company a few months ago. If Facebook is struggling to target its advertising and improve its advertising revenues, does its gargantuan valuation make sense? I think Zuckerberg should take the money and run. I also think that Lee Lorenzen, a venture capitalist, and his prediction that Facebook is worth $100 billion is a case of shrewd exaggeration. What I think is most funny is the fact that all of Lorenzen’s fanboys, the self-branded “social app gurus” and developers of tiny Facebook apps are all eagerly drinking the spiked punch. There are few better examples of confirmation bias in action.

My main problem with Anderson’s analysis is his implied assumption that the currently high advertising rates the niche vertical social networks enjoy will stay relatively high. Based on his personal experience, he concludes that Ning’s advertising rates are greater than Facebook’s and Myspace by at least a factor of ten. I don’t think this will last. Web 2.0 methods are precisely that, methods. They can be products, but they are also methods or general, conceptual best practices. As such, the ability to create robust social networks for different verticals will diffuse to a critical mass of software engineers. As that process accelerates, social networks and features of social networking will become commonplace or commoditized. I’ve alluded to the commoditization of social networking applications, which is a related problem. When this process nears its peak, advertising rates for all social networks will have diminished drastically. Self-proclaimed “social app gurus” and “social network gurus” who have staked their futures on social networking will ultimately prove themselves as less than prudent.

When critical mass is achieved, the eagerly welcomed venture capital that forms to service innovative startups becomes a hot topic of conversation. Networking groups begin to get together to talk about how to raise money from venture capitalists. “Consultants” come out of the woodwork claiming expertise in helping new companies attract venture capital. Venture capitalists are looked upon as “masters of the universe” and treated like rock stars. University business school programs institute curricula aimed at instilling students with an understanding for the process. MBA grads and finance majors from those same university business schools decide they want to become venture capitalists. Local business magazines hyperventilate upon the sexy subject. Entrepreneurs talk in awed tones about their peers who have successfully attracted funding. Angel groups form and hold workshops or seminars about the process of fundraising. Websites with glossaries of mysterious VC lingo spring up out of nowhere.

We have glamorized venture capital beyond reasonableness. We spend an inordinate amount of time, energy, and attention on the subject of venture capital and end up mythologizing it. Because we talk about it so much - in such reverent tones - entrepreneurs unfortunately fixate on it at the expense of other critical components to building great companies. Would-be entrepreneurs start to reason that they must get venture funding in order to “really do something.” It is a convenient excuse to do nothing. Because we talk about venture capital so much, some of us start to see raising capital as the ultimate measure of success. “If I could just raise one million dollars, things would be different.”

Can we talk less about venture capital and more about great ideas and business building? Sure there are some programs that mix in subjects like building a great management team, hiring best practices, networking and relationship building, but venture capital gets the overwhelming majority of attention. What we need more of are entrepreneurs with the ability to figure out if their pet idea is something worth pursuing. At the very least, we need workshops and seminars that help entrepreneurs figure out if their idea, frankly, sucks. We need to talk more about making sure that our ideas are unique and bring some sort of new value to the world. We need to talk about how to execute better than your best competitor. We need entrepreneurs that can focus on the essentials of building great companies.

What entrepreneurs ought to realize is that venture capital follows true innovation and execution. It goes where the action is. It does not precede the action. Entrepreneurs who are willing to put the work in to become savvy about the whole process will come to understand that raising venture capital is relatively easy when compared to out-thinking and outrunning your best competition. It is much easier than keeping customers ecstatic. Raising venture capital is immensely easier than finding and acquiring the scarcest resource of all, great talent. Raising venture capital is not the end game. We need to stop perpetuating the myth.

The Nasdaq Composite continues to roar back from the recent market slide with a strong 2.2% gain last week. This makes my tech market bifurcation thesis look increasingly faulty. The bellwether technology issues have performed well as predicted, but so has the middle tier and even the bottom tier. International growth accounts for much of the resilience and strong performance. Technology companies reporting satisfactory or better results included Affiliated Computer Services (ACS), a business processing outsourcing and information technology services firm, Ansys (ANSS), a provider of engineering simulation software, Expedia (EXPE), the online travel e-commerce company, TeleCommunication Systems (TSYS), a provider of carrier-class wireless technology, Concur Technologies (CNQR), a maker of expense management software, LoopNet (LOOP), a website for commercial real estate listings, and Symantec (SYMC), the security software giant.

What about the rest of the market? Hallelujah! The Oracle of Omaha, Warren Buffett, has openly stated that the worst of the recent credit crisis has passed. Many value lemmings and growth copycats will take this as reason to dive back into the market with enthusiasm. Indeed, we are an eager shareholder society and investing is both pastime and profession. Investing might very well be religion. It is so for the pilgrims that never miss the Berkshire Hathaway (BRK-A) annual pow-wow to join in the proceedings presided over by high priests Buffett and Munger. The event occurred just this past week and, as usual, Buffett warned shareholders of smaller future returns for Berkshire. This warning is coming from the greatest investor alive, the prophet of profit, and the diminishing returns doctrine is probably the one part of the gospel the congregation finds hard to believe. We’ve all grown accustomed to his ability to outperform and deliver us from the evil of poor returns.

Macro

American taxpayers should be receiving their economic stimulus checks in the coming weeks. Will this provide the country with a sudden explosion of consumer spending? The bureaucrats in Washington believe that the increased spending will pull us out of the recent economic slump. But what will we probably do with our returned tax dollars? For the legions of homeowners who have seen the value of their most significant asset plummet in price, will they put the check towards a mortgage payment? Robert Shiller, the economist and father of the Standard & Poor’s/Case Shiller housing price index, predicts that housing declines have not come to an end and further declines could exceed the damage suffered during the Great Depression. In that scenario, homeowners on the brink of mortgage default would just walk away and spend their stimulus checks elsewhere instead of holding onto homes with values underwater.

Micro

Interactive Intelligence profit drops, sales rise - Confirmation bias, the cognitive error whereby investors search only for evidence that confirms their beliefs, is a very common mistake. With the second paragraph of this post, I run the risk of committing the more surreal non-confirmation bias, whereby I cite only evidence that refutes my tech market bifurcation thesis. So I best avoid this masochistic foible by pointing to Interactive Intelligence’s (ININ) somewhat disappointing earnings report. The company’s call center management software generated record sales but profits actually declined from the year ago quarter. There has been much debate about where corporations cut back expenditures in recessionary or slowing economic environments. The consensus is that advertising is the first thing cut. I don’t think so; I believe that short-sighted corporations tend to cut customer service functions and budgets. If true, ININ remains in trouble. Full Disclosure: I currently have a long or short position in ININ in one or more of my private investment partnerships.

MicroStrategy 1Q profit declines as operating expenses rise - Here is another case of a technology company that was able to grow sales while seeing profits decline. Are second-tier technology companies losing pricing and negotiation power? Are large corporate customers taking advantage of the slowing economy as an opportunity to demand better terms from technology suppliers? I remember when MicroStrategy (MSTR) generated as much hype as Salesforce.com (CRM); the promise of business intelligence software was as big as sales management software. Michael Saylor’s company took investors on an 18.6% dip last Friday.

Sohu 1Q profit soars with rising brand ad, online game sales - Last week, I profiled Sohu.com (SOHU), a Chinese Internet portal and online gaming company. Since then, the company reported record results and the stock rose an astonishing 25.6% in the space of five trading days. Sohu.com’s TianLong Babu massive multiplayer online game has become a best seller. The long term prospects for this company should be extremely bright and so are the long term prospects for the gaming industry in Asia. However, buyers of the stock now would be paying premium prices.

Perfect World Collaborates with Intel and Haier - Perfect World (PWRD) is another online gaming company based in China. The new alliances with Intel (INTC) and Haier give it some serious marketing muscle to push its massive multiplayer online games (MMOGs). They’re usually called “massively multiplayer online role playing games” (MMORPGs) but I’m going to keep it short and sweet. I’m also going to assume that future large scale games will not all be role playing game formats. Someone is going to produce a smash hit with a massive scale first person shooter like Halo.

Dolby posts higher Q2 profit; raises 2008 view - I used to take the public bus to high school in the ghetto and pass by the red brick building that houses Dolby Laboratories (DLB). San Francisco was an interesting place to grow up. One minute I’m riding the bus through the South of Market neighborhood and checking out the shingles of creative technology companies and the next minute I’m riding through the ghetto looking at beat up cars and pit bulls loosely chained behind chain link fences. Unlike in the digital video space, where scores of competing codecs vie for dominance, the digital audio space is in fact dominated by Dolby technology.

AgFeed Industries Completes Previously Announced Acquisition - China’s economy is bound to slow down just a bit as global macro factors diminish the competitive advantage of its low cost labor force. Nevertheless, population growth is unlikely to slow much and all those billions of hungry mouths to feed bode well for food companies. AgFeed Industries (FEED) produces hog feed and chicken feed. The company is aggressively expanding into hog raising and turning itself into a vertically integrated food producer.

How has my skepticism aligned with reality? As usual, I’m wrong more often than I’m right. Over the past week, Apple (AAPL), Amazon.com (